Three Things I Think I Think – Bitcoin, Memes And Inflation

Here are some things I think I am thinking about:

1) Moar Bitcoin!  Back when I was a young adventurous person I used to have an exciting portfolio filled with interesting individual stock bets. But then I learned a bunch of economics/finance, got old/fat, and turned into a pretty boring indexer. So I just love it when other people make wildly insane bets that I can write blog posts about. And I think that’s why I love the MicroStrategy story so much. In case you haven’t been following along, Michael Saylor, the firm’s founder has basically turned into a full-blown laser-eyed Bitcoin Maximalist. He’s convinced that the USD is going to blow up and that 15% annual inflation is coming. So he doesn’t want to hodl his firm’s cash in USD. But instead of going down the traditional finance route of owning, you know, fairly low vol assets like T-Bills, T-Bonds or even stocks, Saylor went straight for the highest vol asset around – Bitcoin.

As I’ve said before, I think this is wildly imprudent. But I am just a boring traditional old finance guy who has been dead right about inflation for pretty much 20 years running. So who am I to talk? I kid, kind of. The thing that’s so fascinating to me about the MSTR bet is that it upends so many of the traditional economic and finance narratives. I mean, if Saylor is right then most of the narratives in macroeconomics about inflation and money will end up looking, at a minimum, directionally wrong and perhaps fundamentally wrong. So, I kind of like the bet because it is forcing me to reconsider most of my priors. I’ve always been open-minded to crypto and I think it has tremendous potential. At the same time, there are tons of terrible narratives in the space. Or, at least narratives that I think are terrible that I could end up being very wrong about….

But here’s the thing about this bet, macroeconomic theories aside, that I just can’t stomach – Saylor is treating his firm like it’s a perpetual entity. So he’s aligned the firm’s assets to that duration. And one could argue that Bitcoin is a super-duper long-duration asset given the way the protocol is designed to issue new coins over the next 119 years. Here’s the problem with this – corporations are only perpetual in theory. In reality, they have to adhere to short-term liquidity constraints. And that’s where Bitcoin is a big f*cking mess because, with a standard deviation of ONE HUNDRED AND FIFTY PERCENT and regular 80% drawdowns, the asset exposes MicroStrategy to enormous downside risk in the case of some unusual circumstance such as a BTC crash that just so happens to coincide with a tech recession. The major worry is that the firm’s actual cash flows collapse at the same time the BTC position collapses. And then you risk a perverse feedback loop where the firm becomes a forced seller of BTC to create liquidity to remain solvent, which makes the entire BTC collapse worse, which snowballs, etc etc. It’s almost like Saylor has turned a nice little boring data firm into a financialized weapon of potential mass destruction. Except, unlike something like a mortgage backed security which is a diverse package of pretty safe low vol assets, the whole thing is collateralized by one insanely volatile asset.

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Disclaimer: The content in this article is provided as general information only and should not be taken as investment advice. Article content shall not be construed as a recommendation ...

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